This is the latest installment of a new CAP series called “Big Ideas for Small Business.” The weekly series aims to offer a collection of bold proposals that taken together will form a progressive pro-business agenda for the small- and medium-sized companies—and future big companies—our economic competitiveness depends on.
In this space CAP’s economic policy team will offer a weekly pro-growth alternative to the simplistic conservative advocacy for irresponsible tax policy and unaccountable government that are hardly the real priorities of small businesses—and that will do nothing to boost economic growth and ensure widely shared prosperity.
The problem: Small businesses don’t see enough customers
My mother is part owner of a small bookkeeping business, and her business model, like so many small businesses, depends on sales—in this case, her clients’ sales. The past few years have been tough since her clients are experiencing weak sales and as a result, cannot afford to hire a bookkeeper.
Her kitchen-table concerns confirm what other small-business owners report each and every month. The National Federation of Independent Businesses—an organization of businesses that have 40 or fewer employees—conducts a monthly survey of its members. In October it reported, as it has for more than three years, that “sales” are the single-most important problem for its members.
This isn’t surprising in the wake of the housing crisis and millions of Americans loosing their jobs. With so many Americans continuing to struggle to find work and those with jobs tightening their belts, business owners watch as their customer base dries up. Alongside weak sales, small businesses are also struggling with access to credit. In tough times like these, banks are less willing to lend to small businesses that don’t have a strong customer base. Yet credit is often the lifeline of small businesses.
The solution: Boost demand and expand access to credit for small businesses
The federal government has a role to play in helping small businesses grow and thrive. In the past, government investments in new, innovative businesses helped many companies grow into household names. Three big cases in point: The Small Business Investment Company program, financed by the federal Small Business Administration, helped Nike Inc., Apple Inc., and FedEx Corp. grow into the global business powerhouses they are today.
And in times of labor market weakness, presidents and Congresses of all political stripes—including the Bush administration—have embraced short-term, temporary fiscal expansion to boost sales and lead to job creation. These kinds of policies help support the sales of small businesses across America.
We know these policies work as intended. An empirically grounded body of literature documents the effectiveness of fiscal expansion and the importance of economic multipliers—how a dollar spent by the government can create more than a buck in terms of economic output—in creating jobs above and beyond those directly created by one firm or one government project.
That’s why President Obama’s American Jobs Act includes a number of key proposals specifically targeted at small businesses. Specifically, the proposed legislation includes tax cuts aimed at helping small businesses hire and invest. If enacted, the law will cut in half firms’ payroll taxes on the first $5 million, and will provide a complete payroll tax holiday for employers who create new jobs or increase wages, capped at the first $50 million in new wages. The American Jobs Act will also extend 100 percent business expensing through 2012.
Every company will benefit, but small businesses will see a larger boost.
The American Jobs Act also will help small businesses and entrepreneurs access capital and will streamline regulations that affect small businesses. This includes accelerating payments to small businesses that contract with the federal government, creating a one-stop online portal for small businesses to access government services, and working with the Securities and Exchange Commission to enhance private-sector investment opportunities for small businesses.
Another one of the Obama administration’s policies, the Start-Up America Initiative, is working to expand the programs that initially helped so many of today’s household names such as Nike. It is working to collaborate with institutional investors to make “impact investments” into small business concerns and provide expedited licensing and capital to fund managers who qualify.
Next steps: Enact the American Jobs Act
These are the kinds of proposals that traditionally enjoyed bipartisan support as well as support from small business organizations. In 2010, 50 House Republicans—including Michelle Bachmann (R-MN) and Select Committee on Deficit Reduction member Jeb Hensarling (R-TX)—co-sponsored legislation (The Economic Freedom Act of 2010) to cut in half employer- and employee-side payroll tax rates, and expand allowances for business expensing, along the lines of President Obama’s plan.
The National Federation of Independent Business at the time wrote a letter of support for the legislation, saying that the bill’s payroll tax reduction would “provide real and immediate help” to small businesses and their employees for whom “payroll taxes are often the highest taxes paid.” It further concluded that the reductions would “promote economic expansion and help small business owners.”
With bipartisan support, small businesses can once again become the job creators America needs. There’s very little that small entrepreneurs such as my mother can do to recreate the kind of customer base that they had a few years ago. But there are things that Washington can do. Providing a little boost to the economy and enacting measures that reduce costs are exactly the right set of policies to help small businesses grow and thrive anew.
Heather Boushey is Senior Economist at the Center for American Progress.